Maximum Home Health v. Shalala, 00-6240

• Decision Date: 24 September 2001
• Docket Number: No. 00-6240,00-6240
• Citation: 272 F.3d 318
• Parties: (6th Cir. 2001) Maximum Home Health Care, Inc., Plaintiff-Appellant, v. Donna E. Shalala, as Secretary of the United States Department of Health and Human Services, Defendant-Appellee. Argued:
• Court: U.S. Court of Appeals — Sixth Circuit

Page 318

272 F.3d 318 (6th Cir. 2001)

Maximum Home Health Care, Inc., Plaintiff-Appellant, v. Donna E. Shalala, as Secretary of the United States Department of Health and Human Services, Defendant-Appellee.

No. 00-6240

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

Argued: September 24, 2001

Decided and Filed: November 15, 2001

Appeal from the United States District Court for the Middle District of Tennessee at Nashville. No. 99-00299. William J. Haynes, Jr., District Judge.

John P. Konvalinda (argued and briefed), James S. McDearman (briefed), GRANT, KONVALINKA & HARRISON, Chattanooga, Tennessee, for Appellant.

Michael L. Roden (briefed), ASSISTANT UNITED STATES ATTORNEY, Nashville, Tennessee, Howard H. Lewis (briefed), Department of Health and Human

Services, Office of the General Counsel, Atlanta, Georgia, for Appellee.

Before: MERRITT, SILER, and DAUGHTREY, Circuit Judges.

OPINION

MERRITT, Circuit Judge.

This case arises under Title XVIII of the Social Security Act (the "Medicare Act"), 42 U.S.C. § 1395 et seq., as a challenge to the denial of reimbursement of costs for providing health care to Medicare patients. Plaintiff Maximum Home Healthcare, Inc. ("Maximum") appeals the district court's judgment affirming the denial of Medicare reimbursements by Department of Health and Human Services Secretary Donna Shalala ("Secretary" or "Defendant"), in the amounts of $58,272 and $79,354 for the fiscal years 1990 and 1991, respectively. Maximum argues that the denial of reimbursement is arbitrary and capricious, or in the alternative, is not supported by substantial evidence. Because the Secretary has informally imposed on Medicare providers a "competitive bidding" requirement not previously made a part of Medicare regulations, the holding of the district court is REVERSED.

Facts

Maximum is a certified home health care agency that provides management consultant services to companies administering medical care to Medicare patients. In 1988, Maximum entered into a contract with Diversified Health Management Company ("Diversified") to provide management services. For the fiscal years in question, Maximum charged $13.00 in 1990, and $13.60 in 1991, for each visit by Diversified to a Medicare patient. Under the Medicare Act, the Secretary contracts with a fiscal intermediary (the "intermediary") to process and audit reimbursements to providers such as Maximum. See 42 U.S.C. §§ 1395h, 1395oo(a)(1)(A)(i); 42 C.F.R. §§ 413.20, 405.1803(a)(1)(1997). In this case, Blue Cross and Blue Shield of South Carolina was the intermediary. After reviewing Maximum's fees, the intermediary determined that the average per visit rate was $9.74 for comparable companies during both 1990 and 1991. As a result, the intermediary found that Maximum's fees were substantially out-of-line ¹ with market values. Because the Medicare Act requires that costs not be substantially out-of-line from costs of comparable institutions, the Secretary denied reimbursement of Maximum's fees for amounts above $9.74 per visit. See 42 C.F.R. § 413.9(c)(2)(articulating the substantially out-of-line standard).

Pursuant to 42 U.S.C. § 1395oo, Maximum appealed the intermediary's determination to the Provider Reimbursement Review Board (the "review board"). The review board reversed the intermediary and awarded full reimbursement to Maximum. In its reversal of the intermediary, the review board found that the intermediary's study was flawed because the companies to which Maximum was compared had been chosen arbitrarily and there was no evidence that the services offered by Maximum were identical to the other companies. In addition, the review board also found that a study done by the independent accounting firm KPMG Peat Marwick was more persuasive than the intermediary's study based on KPMG's more thorough componetized market analysis. The KPMG study found an average cost of $11.38 per visit, with a standard deviation of $2.93. Because Maximum's costs fell within the standard deviation, the review board found that they were reasonable and not substantially out-of-line with the market.

The intermediary then appealed to the Administrator of the Health Care Financing Administration, acting on behalf of the Secretary. The Administrator reversed the review board, and reinstated the decision of the intermediary. In finding that Maximum was not entitled to reimbursement in excess of $9.74 per visit, the Administrator looked for guidance from the Medicare Provider Reimbursement Manual (the "manual"). Relying on the manual, the Administrator held that Maximum was not a prudent buyer, ² and as a result, held that its costs were not reasonable. See PRM §§ 2102.1, 2103A (articulating the prudent buyer standard). Specifically, the Administrator found fault with Maximum's failure to follow the manual's suggested procedures and solicit competitive bids ³ before entering into a contract with Diversified. See PRM § 2135.2 (suggesting the solicitation of competitive bids). In addition, the Administrator relied on the survey by the intermediary and discounted the survey by KPMG, noting that the KPMG study did not name the comparable companies used in its survey. Relying on the prudent buyer principle and following the reasoning of the Administrator, the district court affirmed the decision of the Administrator by issuing a judgment on the administrative record. Maximum timely appealed the decision of the district court.

Discussion

The question before the Court is whether the Administrator's denial of reimbursement to Maximum was arbitrary and capricious, contrary to law, or unsupported by substantial evidence. See 5 U.S.C. § 706(2); see e.g., Medical Rehab. Serv. P.C. v. Shalala, 17 F.3d 828, 831 (6th Cir. 1994). The Medicare Act provides that reimbursements are to be made where the costs claimed are reasonable. See 42 U.S.C. §§ 1395d, 1395i, 1395x. The Medicare Act defines reasonable cost as "the costs actually incurred . . . and shall be determined in accordance with regulations establishing the method or methods to be used, and the items to be included, in determining such costs." 42 U.S.C. § 1395x(v)(1)(A). Both the regulations and the manual provide additional guidance in determining what constitutes reasonable cost. The regulations mandate applying the substantially out-of-line standard, and the manual advocates using the prudent buyer standard. See supra n.1 and 2. Neither the regulations nor the manual make clear how these two standards should be reconciled.

The Plaintiff argues that the Administrator's reliance on the prudent buyer standard is misplaced because it is inconsistent with the substantially out-of-line standard, and a regulation trumps a manual provision. On their face, the substantially out-of-line standard and the prudent buyer provision as articulated in PRM §§ 2102.1, 2103A appear to be reconcilable. The Secretary could reasonably require the Plaintiff to act as a prudent buyer to avoid charging excess fees which are substantially out-of-line with the market valuation of the services. ⁴

The Administrator, however, reads the prudent buyer concept as including a competitive bidding or similar market survey requirement. See supra n.3. Under PRM § 2135.2, the Administrator found that, to act as a prudent buyer, a provider must meet the additional requirement of engaging in a competitive bidding process or otherwise making an undefined search of the marketplace. Insofar as it adds the requirement of competitive bidding or equivalent process, we find that the Administrator's interpretation of the prudent buyer principle is inconsistent with the substantially out-of-line test.

Because the Administrator relied on a manual provision that was inconsistent with an administrative regulation, we hold that his denial of full reimbursement to Maximum was arbitrary and capricious. The purpose of a regulatory scheme such as Medicare is to provide uniform rules by which all participants may be treated equally. See generally 42 U.S.C. § 1395 et seq. Where an administrative agency creates manual provisions that are inconsistent with the governing regulations, it creates for itself a kind of open-ended discretion in its administrative investigations, and opens the door to disparate treatment of interested parties. By adding the...